Class 4: Relative Cost Analysis and Focus Strategies
MG106 Strategic Management
José Ignacio González Rojas
London School of Economics and Political Science
June 27, 2025
The Express Mail Wars 📦✈️
1997: An industry dominated by giants…
…yet one small player thrives 🎯
Today’s Investigation 🔍
Four Questions to Explore
1️⃣ How and why has the express mail industry structure evolved?
2️⃣ How have the changes affected small competitors?
3️⃣ How has Airborne survived and prospered?
4️⃣ What are the sources of Airborne’s competitive advantage?
Framework: Five Forces + Business Model Analysis
Task: 15 minutes, discuss questions in teams 🕐
Go! Start with Industry Evolution 🚀
Focus on what’s changed over time
Question 1: Industry Evolution 📈
How Has Express Mail Changed?
From Startup to Consolidation
The Early Days (1970s) 🌅
- FedEx: 186 packages first night
- Simple hub operations
- Manual sorting
- Modest fixed costs
- Many small players viable
The New Reality (1990s) 🏭
- 5+ million packages daily
- $860M automated hubs
- $3B IT investments
- National advertising wars
- 3 players = 85% share
What drove this transformation?
The Escalation Dynamic 🚀
Why Did Fixed Costs Explode?
The vicious cycle of competition 🔄
The Price Tag of War 💸
Just How Big Are These Investments?
Hub automation: UPS Louisville → $860 million 🏭
Aircraft: One Boeing 767 → $90 million ✈️
IT catch-up: UPS (1990-95) → $3 billion 💻
Annual advertising: FedEx → $138 million/year 📺
Can small players afford ANY of this?
The Sutton Effect 📈
From Competition to Concentration
The Pattern 🔄
- Intense competition
- Escalating investments
- Higher sunk costs
- Small players exit
- Industry concentrates
The Result 📊
- 1970s: Many players
- 1997: Big 3 = 85% share
- Small players: Dead or dying
Classic endogenous sunk costs
Key insight: Competition itself changed the industry structure 🎯
FedEx vs UPS: The Convergence
Two Giants, Two Different DNAs
FedEx (1973) 💜
- Born in the air ✈️
- “Absolutely, positively overnight”
- Technology pioneer
- Empowerment culture
- Premium positioning
UPS (1907) 🤎
- Ground up heritage 🚚
- Efficiency obsession
- Time-motion studies
- Command & control
- Cost leadership
But then came the “Parcel Wars”… ⚔️
The Race to Sameness 🏁
By 1997: Mirror Images
The Convergence:
- Products: Both offer overnight, 2-day, same-day ✓
- Technology: Both have tracking, IT, guarantees ✓
- Customers: Both chase consumer + business ✓
- Pricing: Both discount 50% off list! 💸
Only 2 differences remain:
Culture (history) + Ground network (UPS only) 🚚
Question 2: Impact on Small Players 💀
The Casualty List
How Have Changes Affected Small Competitors?
The Victims 📉
- Emery/Purolator: Retreated to heavy cargo
- BAX: Pushed to periphery
- Roadway Global Air: Exit after $100Ms losses
- Others: Marginal players at best
Operating margins? Single digits 😰
Why They Failed ❌
- Can’t match scale investments
- Price pressure from giants
- Service expectations rising
- No defensible position
Small + Undifferentiated = Dead
Yet Airborne thrives with 16% share… HOW? 🤔
The Scale Disadvantage Visualized 📊
The Death Spiral ☠️
Unless you find a different way to compete…
Question 3: Airborne’s Survival 🛡️
How Has Airborne Prospered?
Despite Everything, They’re Thriving!
The Numbers 📈
- 16% market share
- Fastest growing for years
- Stock price doubling
- Profitable (finally!)
The Puzzle 🧩
How does a company 1/9th the size of FedEx survive when others died?
Let’s analyze their model…
Hint: It’s not about competing head-to-head 🎯
Airborne’s Customer Focus 🎯
The Power of Saying “No”
YES to ✅: Large volume • Predictable • Dense routes • B2B • Price-sensitive
NO to ❌: Residential • Seasonal • Rural • Consumer • “Absolutely positively”
Paradox: Targeting the MOST powerful buyers? 🤔
Answer: They can serve them differently
The Activity System Revolution 🔧
Every Choice Reinforces the Strategy
| Activity | FedEx/UPS | Airborne |
|---|---|---|
| Aircraft | New planes 💰 | Used planes ✈️ |
| Hub | Automated 🤖 | Manual sort 👷 |
| Airport | Pay landing fees | Own airport |
| Delivery | Employees | 65% contractors |
| Marketing | $138M ads | Zero ads 📵 |
| Service | 10:30 AM | Noon delivery 🕐 |
The System Logic 🔗
Why Airborne’s Choices Work Together
Each “cheap” choice enables the others:
Predictable volume → Manual sort works ✓
B2B focus → No consumer ads needed ✓
Dense routes → Contractors reliable ✓
Result: 30% by truck, 80% plane utilization 🎯
You can’t copy just one piece!
Quantifying the Advantage 💰
The 20% Cost Edge
FedEx: $8.55/letter → Price: $9.00
Airborne: $6.88/letter → Price: $7.20
How? Contractors • 80% utilization • No ads • Lower overhead
But watch marginal costs… ⚠️
Question 4: Competitive Advantage 🏆
Sources of Airborne’s Advantage
Beyond Just Being Cheaper
Cost advantages 💰: Avoided fixed costs • Variable > Fixed • 80% utilization
Strategic advantages 🎯: Perfect customer fit • Competitor inflexibility • System coherence
Lower costs ARE the strategy - but only for THEIR customers
The catch? High marginal costs make them vulnerable ⚠️
The Achilles’ Heel ⚠️
Average vs Marginal Costs
Average Cost ✅
Airborne wins by ~20%
- Spread fixed costs better
- Efficient operations
Marginal Cost ❌
Airborne likely loses
- Contractors cost more/package
- Old planes less fuel efficient
- Manual sorting labor-intensive
In a price war, Airborne dies!
Critical: Must keep FedEx/UPS uninterested in their segment 🛡️
Strategic Challenges Ahead 🎯
What Threats Does Airborne Face?
Now: Distance pricing • Giants eyeing their segment • Tech demands ↑
Future: Scale race continues • Need ground network? • RPS partnership?
💣 October 1997: FedEx buys RPS for $2.4B
Now what? 😰
Key Takeaways 📚
Lessons from Airborne Express
Strategic: Industry evolution creates niches • Focus enables survival • Low cost ≠ Safe
Analytical: Track industry dynamics • Map business models • Analyze costs (average + marginal)
Epilogue: DHL bought Airborne (2003) for $1.2B
Not bad for the little guy! 💪
For Monday 📚
Southwest Airlines in Baltimore
Consider: Another David vs Goliath story?
Key question: What happens when the focused player grows? 🤔